Lesson

Bitcoin as an Asset

Bitcoin is commonly called a cryptocurrency. That word links it with other kinds of currency such as dollars and yen. Currencies are so called mediums of exchange. That is, their purpose is to pass from hand to hand in exchange for items of value. There are plenty of places to spend Bitcoin this way including such big vendors as Overstock and Expedia, but it’s far more often used as an investment vehicle, or to store value. Let’s examine its use as an asset rather than a currency, by looking at three things.

Its value, how easy it is to exchange, also known as its liquidity, and how easy it is to hold, which I’m calling protectability. Bitcoin’s value has been a history of sudden price spikes followed by slow sags, followed by more spikes. The first big spike came in 2011 when its value shot up from pennies to almost $30, but few people knew about Bitcoin then, and there weren’t many trustworthy ways to buy it and sell it. After this first rally, it sagged to near two dollars.

Bitcoin’s first taste of mainstream fame came with the second spike in 2013, when the government of Cyprus announced a plan to seize certain bank deposits. Cypriots got their money out of banks and into Bitcoin, sending the price from about $15 to over $250, before it dropped again to settle around $120. Another big spike in 2013 brought the price above $1,000 before again it dropped pretty hard to just above $200.

Bitcoin had recently experienced its fourth big spike to nearly $20,000. It has sagged again to $6600 at the time of this writing. Will there be future spikes? A lot of people pretend to know, but really nobody does. It’s tempting to focus on the spikes, but anyone thinking of investing in Bitcoin should also keep in mind the sags. If you bought in late 2013 for example, you’d have watched your asset lose value for more than two long disheartening years.

So that’s Bitcoin’s value. Next, we come to its liquidity. How easily you can turn your Bitcoin into dollars or euros, or other forms of value. This was a big problem in Bitcoin’s early days. You basically had to know someone who wanted to buy your Bitcoin. Then exchanges appeared, but many were unreliable or flat out criminal. The biggest of these was Mt. Gox which was handling over 70% of all transactions. That is, until the company suddenly shut down, taking with it over half a million Bitcoins, which today would be worth billions of dollars depending on the market.

Nowadays, reliable Bitcoin exchanges have mostly shaken out the unreliable ones, but money changing also falls under government control, and debates still rage about how to regulate Bitcoin exchanges. I expect these debates to continue for some time, and they will affect Bitcoin’s value as an asset. Finally, we come to protectability. In short, if attackers can capture your passwords, they can steal your Bitcoin because your password is all that’s protecting it. But in reality, the risk of an attacker stealing your Bitcoin isn’t as big as it simply disappearing.

People have lost Bitcoin by upgrading a computer, by losing control of a phone number, by tossing old electronic junk, and dozens of other ways. This is the secret that Bitcoin enthusiasts don’t like to talk about. Digital assets like Bitcoin are incredibly fragile. In short, I expect Bitcoin to continue to have value as an asset. Even with its history of peaking and sagging, it’s held its value over the long run.

But any potential Bitcoin investor has to be aware of its particular challenges.